Portfolio Realignment in Mutual Funds: Tips & Strategies –

Investments in a mutual fund could fluctuate based on market movements. During market fluctuations, the value of different funds in a portfolio can increase or decrease, causing changes in the investment balance. This can result in a difference between the planned asset allocation and the actual portfolio. Rebalancing is the process of realigning the investments to restore them to the original plan. It might include purchasing or selling assets to maintain the desired mix of assets. Rebalancing can assist investors in controlling risk and keeping their portfolios aligned with their long-term financial objectives. Regularly monitoring portfolios may help in informed decision-making. This article explains what is portfolio realignment and some essential tips and strategies to realignment a portfolio.

What is Mutual Fund Portfolio Realignment? –

Mutual funds contain various kinds of investments, such as equity and debt. When you invest, you can select a combination, for example, 75% equity and 25% debt. Over time, changes in the market can lead to a change in this proportion. Portfolio Realignment is the process of adjusting your investments to restore the initial combination. It can involve purchasing or selling mutual fund units to bring your investment according to your intended allocation. Your goals and needs may also change over time, so realigning your portfolio keeps investments aligned with your needs and preferences.

Importance of Realigning Portfolio with Goals –

Realigning your portfolio is important to keep it in line with your financial goals. Your asset allocation is influenced by three prime factors, such as investment horizon, financial goals, and risk tolerance. With time, market fluctuations can change this balance as the value of the assets tends to change. This can increase the overall risk beyond your tolerance levels. For instance, a mix of 65% equity and 35% debt can result in 80% equity and 20% debt based on market performance. This could subject you to more risk than desired. Periodic realignment re-establishes the optimal balance to provide stability and efficient long-term financial planning, avoiding unnecessary risks.

When to Realign Your Mutual Fund Portfolio? –

Realigning your mutual fund portfolio is necessary to ensure proper asset allocation. Do it every six months or a year, or following significant market fluctuations. Here's when you should realign your portfolio.

• Overexposure in One Asset Class:

During a bull market, equity funds could dominate your portfolio, raising risk. If your allocation diverges beyond a specified threshold (e.g., ±10%), realign to regain balance.

• Persistent Underperformance:

If a fund has consistently underperformed its peers and benchmarks for two to three years, you may consider switching to a high-performing scheme.

• Financial Changes:

An increase in salary or a loss of a job might require a reallocation of the portfolio based on evolving financial situations.

• Fundamental Changes:

Major changes in a fund's aim, manager, or risk profile might require realigningthe portfolio.

• Retirement:

As you get close to retirement, stability over growth becomes important. Switch to debt funds from equity with an aim to protect the accumulated wealth and minimise risk.

How to Realign Your Mutual Fund Portfolio? –

Here are some strategies that may help you in realigning your portfolio.

Review your portfolio -

The first step is to review your current mutual fund portfolio and identify which funds have moved away from your target asset allocation. You can do this by comparing your current mutual fund holdings across categories such as equity, debt, and hybrid to your original investment plan or target allocation.

Determine Your New Target Allocation -

After you have identified the funds that need to be realigned, determine your new target asset allocation. This may require you to sell a few overperforming funds and invest in underperforming ones to bring your portfolio back in line with the desired asset allocation. This is important to hedge risk because even though the funds may be overperforming now, overexposure to one asset class may lead to massive losses when that asset class declines in value.

Decide a Strategy -

When realigning your mutual fund portfolio, you may use several strategies, such as selling and buying, making new investments, or automatic realigning. Choose a strategy that is suited to you and your investment goals.

Execute the Strategy -

Typically, if you choose to sell and buy, you will need to sell over performing funds and use the proceeds to buy underperforming funds. However, you can invest additional capital in the underperforming funds or in more funds of the asset class to which you want to increase your exposure. For instance, if you have a lumpsum investable amount, and currently, your equity exposure exceeds the target allocation, instead of selling your existing equity investments, you may use this amount to invest in debt funds, which would have the same effect of portfolio Realignment.

Monitor Your Portfolio -

After Realigning your portfolio, you should monitor it regularly to ensure that it remains consistent with your investment goals and risk appetite, which would help you to achieve your financial goals effectively.

Important Aspects to Keep in Mind While Portfolio Realignment–

Consider the following while realigning your portfolios.

1. Check Your Goals and Risk Level: -

Before making changes, check if your financial goals and risk level still match your needs. Your investment plan should stay relevant to your situation.

1. Consider Tax Impact: -

Selling mutual funds in India can lead to taxes like long-term capital gains (LTCG) and short-term capital gains (STCG). A financial expert may help you understand the tax impact before rebalancing.

1. Avoid Over- Realignment: -

Realign only when needed. Changing too often can increase costs and reduce potential gains.

1. Utilise New Investments: -

Invest funds in underperforming assets rather than selling current assets.

Final words –

Portfolio Realignment is essential while investing in mutual funds. You need to review and Realign your mutual fund portfolio regularly. Review your portfolio, determine the new target allocation and monitor it after implementing your strategy. Always ensure that your portfolio is aligned with your financial goals, risk appetite, and investment horizon. Moreover, you may consult a financial advisor. An expert can help you make timely decisions and help you achieve your goals without taking excessive risks.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

Views and opinions contained herein are for information purposes only and should not be construed as investment advice/ recommendation to any party or solicitation to buy, sale or hold any security or to adopt any investment strategy. It does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Axis MF/AMC is not guaranteeing/assuring any returns on investments. The recipient should exercise due caution and/ or seek professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein.